How To Tell If You’re Paying Way Too Much In Student Loans (And What To Do About It)

January 23, 2017

When I was accepted into a very prestigious, yet very expensive, college program, my parents said “no.” (Actually, looking back and knowing my parents, it was probably something along the lines of “Hell no, are you crazy??,” but I digress.) The point is, I was forbidden from going, essentially, because my parents refused to co-sign. And as a formerly-dismal student who graduated high school with a 2.2 GPA and never took the SATs, my two years of busting my butt at a community college to get myself into this program to complete my undergrad felt like they were being robbed from me. I had earned that prestigious program, I told them. I had proven to myself, and them, that I was capable of being a smart, hard-working student, and therefore I deserved the best program I was accepted to.

But the program in question would have cost me about $60,000 in loans per year, for three years, and that was with a minor merit scholarship I had earned. My parents simply wouldn’t let me take on that kind of financial burden, and since the inexpensive state school to which I had earned a decent-enough scholarship didn’t interest me, I decided to continue pursuing my degree in France, where public universities costs about as much as a community college here. Long story short, mostly because of the foresight of my parents, I am now nearly debt-free. And considering I never finished my degree anyway, I feel grateful every day for the potential six-figure bullet I dodged.

My story is a relatively unique one, and the fact that student loans don’t dominate a lot of my decision-making makes me feel a mix of gratitude and guilt, because they dominate the financial lives of the vast majority of ~millenials~ I know.

But no matter where you are on the spectrum of “owing a ton of money,” there are always ways to arm yourselves with information, expert advice, and maybe even an excellent new plan to pay it off. To help arm TFD readers, we brought in Stephen Dash, founder and CEO of Credible — think of it like Kayak for student loan refinancing, where one search shows you all your best options — to answer some essential questions everyone needs to know in order to pay off pay their student debt in the smartest possible way.

1. What is student loan refinancing?

Student loan refinancing allows borrowers who have graduated from college and landed a job to take advantage of their improved circumstances and refinance their educational debt, typically at a lower interest rate. Depending on the strategy you choose, refinancing can reduce your monthly payment or save you thousands of dollars in total repayment costs — some borrowers are able to do both.

The way it works is you identify high-interest loans you want to target, and pay them off with a new loan from a private lender. This can not only save you money, but simplify your life by letting you make one monthly payment on all the loans you refinance.

2. What makes me eligible for refinancing?

Some people who haven’t explored refinancing have heard it’s only for graduates with six-figure income and super-prime credit scores. That’s no longer the case. A growing number of lenders will refinance student loan debt, and this competition has been good for consumers.

We’re seeing recent graduates 27 and younger use the Credible marketplace to refinance student loan balances ($49,304 on average) that are nearly as large as their annual salaries ($50,053). Many lenders will refinance the student loan debt of borrowers with credit scores as low as 620 if they have an eligible cosigner.

The big thing that lenders typically want to see is that you’ve got a history of being employed and are paying back your student loans and other debts. Lenders want assurances that you’re going to be able to make the payments on the loans you want to refinance. So they’re typically going to look at your current debt-to-income ratio, your credit score, and your credit history. Not all lenders require that you have a degree, but most aren’t going to refinance anyone who has previously defaulted on a student loan.

Every lender has their own criteria, and some serve different borrower niches. So just because one lender turns you down, or offers you a rate that’s not attractive, doesn’t mean refinancing is not an option. There are currently seven lenders offering student loan refinancing through the Credible platform, and you can check the rates you qualify for with all of them in less than two minutes (without performing a hard check on your credit score).

3. I think I’m paying too much, what should I do?

There are three basic strategies for refinancing — lower your monthly payment, maximize your total savings, or try for less dramatic reductions in both areas.

First of all, don’t rely on your monthly payment alone to decide whether you’re paying too much. To make that call, you also need to look at the interest rate (or rates), on your current loans, your repayment terms (the number of years it will take you to pay off your loans), and your projected total repayment costs. You may have a low monthly payment on your existing loans, but not realize that you’re racking up thousands in extra interest costs because your rates are too high or your repayment terms are too long.

One of the best strategies for borrowers who can afford to make bigger monthly payments is to refinance into a loan with a shorter repayment term. Not only will you make fewer payments, but the shorter the loan term, the lower the interest rate offered by most lenders. Borrowers who have used Credible to refinance into a loan with a shorter repayment term saw their monthly payment increase by $151 on average, but can expect to save $18,668 over the life of their new loan. That’s because they achieved interest rate reductions averaging 1.71 percentage points, and set themselves up to make 59 fewer monthly payments.

If, on the other hand, your current monthly payment is more than you can comfortably handle, you can reduce it by extending the repayment term of your loan. You could take 20 years to pay it back instead of the standard 10, for example. But if you do that in a government repayment plan, you’re not going to get an interest rate reduction, so you could see your total repayment costs increase by quite a lot.

A third refinancing strategy is to lower your monthly payment and total repayment costs by choosing a loan with a lower interest rate but roughly the same repayment term as your existing loan (or loans). You won’t get as dramatic a reduction in monthly payment or total repayment costs as you would if you focused on just one of those goals. However, this can be a good approach for borrowers who can’t afford to increase their monthly payment, but don’t need a big reduction either.

To give you an idea of the results this approach can achieve, consider the total universe of borrowers using Credible to refinance. As a whole, our users trim $25 from their monthly payment, reducing their loan term by an average of 6 months and cutting their total repayment costs by $7,747.

If you have steady earnings and a decent credit score, that’s often enough to get you approved for refinancing. But a cosigner with a better credit score can help you qualify for a better rate. Cosigners are on the hook if you can’t make payments, and late payment could damage their credit score as well as yours. So while a cosigner may be able to help you save thousands of dollars in interest payments, you and your cosigner should be aware of these potential risks. Many lenders will release cosigners from their obligations after the borrower has made two or three years of payments and meet eligibility requirements demonstrating their ability to repay.

5. Will I lose any of my federal loan protections if I refinance?

When you refinance federal student loans with a private lender, you’ll lose borrower benefits like access to income-driven repayment plans and the potential to qualify for loan forgiveness after 10, 20 or 25 years of payments. If you think you will qualify for federal loan forgiveness — particularly Public Service Loan Forgiveness, which provides relief after 10 years of payments — refinancing may not be for you. But be aware that because you’re stretching payments out over a longer period of time, income-driven repayment plans can also drive up your total costs. If job security is a concern, it’s becoming increasingly common for private lenders to offer borrowers protections against unexpected setbacks like the loss of a job or a health emergency, such as options for deferral and forbearance.

6. What’s the minimum amount of loans I need to be eligible for refinancing?

Lenders offering refinancing through the Credible marketplace will refinance student loan balances as small as $3,500, although minimum balance requirements ranging from $5,000 to $10,000 are more common. At the other end of the scale, maximum loan balances range from $150,000 to $500,000, and one of our lenders has no official upper limit. Most of our lenders do not charge application, origination or disbursement fees.

7. How do I find my current loan interest rate?

Your loan servicer can tell you your current interest rate, and how much of your monthly payment is applied to your principal balance. You can retrieve information about all of the federal student loans you have, and find contact information for your loan servicer, through the Department of Education website My Federal Student Aid. If you have private student loans and don’t know who services them, request a free copy of your credit report from annualcreditreport.com.

8. How do I find the rate I could qualify for if I refinanced?

You can see the actual rates you’ll qualify for with multiple, vetted lenders in about 2 minutes by answering a few questions about yourself at Credible.com. Our integrations with lenders and credit bureaus allow us to provide you with personalized rates without affecting your credit score or sharing your information with lenders until you’re ready to move forward with an offer. Remember that private lenders offer both fixed and variable rates. While variable rates typically start out lower, they can fluctuate over time.

9. What does that actually mean? (re: interest rates and how they affect you over time)

The bottom line is that the savings you can achieve from refinancing depend on how much you can lower your interest rate, and how long you decide you’ll need to pay back your debt. A borrower repaying $49,000 in college and graduate school debt at 6 percent interest will pay $65,280 to retire their debt in the government’s standard 10-year repayment plan, or $94,712 if they stretch those payments out over 25 years.

If that borrower qualified to refinance that debt with a private lender into a 10-year fixed-rate loan at 4.5 percent interest, they’d pay back $60,939 in all. So even a small interest rate reduction can produce big savings.

When it comes to student loans, like all of your finances, you need to know all your stats, and all your options — you deserve to live well with your student loans, and to save the most money you can on them.